Bitcoin and cryptocurrencies
This week we’re looking at the evolution of currency. In the last two posts, we covered how money has changed over time, evolving from commodity money to fiat currencies. Now that we’ve considered the past, it’s time to ask what the future holds. At Luno, we believe decentralised cryptocurrencies are the next step in the evolution of money - here’s why.
Currency isn’t a particular material or design or anything like that. If people can, and want to, use it as a means of exchanging value, it’s a currency.
Bitcoin — the next step in the evolution of currency?
As we saw before, anything can count as a currency, if it has five features:
- Divisibility – divides into smaller units (e.g. a dollar divides into cents)
- Scarcity – must be a limited supply (e.g. the supply of gold is limited by the amount we can mine)
- Durability – lasts well even as it’s passed between people (e.g. modern banknotes are waterproof)
- Transferability – simple to exchange between people (e.g. you hand someone a banknote and it’s theirs)
- Fungibility – individual units need to be interchangeable (e.g. any $1 coin has the same payment value as any other)
Bitcoin is considered by some to be a logical next step in the evolution of currency. It fulfills the key features perfectly, and it’s also better suited to our modern interconnected world. Bitcoin is:
- Divisible – one Bitcoin divides into units as small as one hundred millionth
- Scarce – the total supply is limited to 21 million Bitcoin which gives it value
- Durable – as Bitcoin doesn’t exist in physical form, it can’t wear out
- Transferable – Bitcoin is digital so you can transfer it to anyone, anywhere in moments
- Fungible – any particular Bitcoin is equal in value to any other Bitcoin
Trust is also a big part of the equation. That’s not something you can design or force, or create in a short time. Trust takes years to build, which is why we take a long-term view and believe this shift will be gradual. But the technology has evolved to offer us faster, cheaper, safer money with more equal access. Across the world, people are moving towards digital payment systems because it’s no longer necessary to use physical money for everything (we’ll cover this in the next part of this series.)
For someone used to paying with salt, the idea of using a gold coin would be crazy. For people used to the gold standard, fiat currency was a huge shock.
Changes to the way currency works have always been challenging.
Bitcoin remains controversial because it’s new and different to what we’re used to. But if you look at how currency has evolved over time, you’ll see that people have always moved towards whatever system made the most sense at the time. Right now, cryptocurrencies make a lot of sense. At Luno, we believe it’s time to upgrade the existing financial system to something better.